Huarong Says No Change in State Support, Ready to Repay Debt

(Bloomberg) -- China Huarong Asset Management Co. said it’s prepared to make future bond payments and has seen no change in the level of support it receives from China’s government, aiming to allay investor concerns after local media reported that regulators had balked at the company’s restructuring plan.

“At present, there is no factual basis to indicate any change in the shareholding structure or control in ownership, neither is there evidence to indicate any change of support the company receives from the government,” Beijing-based Huarong said in a response to questions from Bloomberg on Thursday. The company said its liquidity situation is “fine” and it has made “proper arrangement” and “adequate preparation” for future bond payments.

Huarong’s bonds sank on Wednesday after Caixin Media’s WeNews reported that the state-owned distressed debt manager has been urged by regulators to solve its financial issues on its own. The company has been instructed to return to its core business and dispose of some domestic units to reduce its capital needs, WeNews reported. An official from rival China Great Wall Asset Management Co. is slated to be named Huarong’s new president, the outlet said.

The WeNews report brought an end to a period of relative calm for Huarong’s bonds, which initially tumbled in April after the company missed a deadline to release 2020 results. The bonds continue to trade at stressed levels, even after Huarong repaid maturing notes on time and China’s banking regulator said the company had ample liquidity. Some analysts have said a lack of market contagion from Huarong could embolden authorities to limit support for the company.

Huarong didn’t comment Thursday on whether regulators are supportive of its restructuring proposal or whether it can publish 2020 financial statements in the second quarter.

The company’s dollar bonds pared some of their early morning losses. The 4% perpetual dollar note was down 0.5 cent on the dollar at 62.7 cents, Bloomberg-compiled data show.

“We still expect state support for Huarong but this may not be a blank cheque bailout, as the government seeks to balance the large contagion risk against promoting market discipline for SOEs,” said Dan Wang, a credit analyst at Bloomberg Intelligence. “A rescue without a haircut for bondholders, in which Beijing would only have to pay about 60 billion yuan, is possible. But the lack of transparency means a much larger capital injection could be needed, and that could well involve haircuts.”

Read more: Shape of China’s Huarong Resolution Could Depend on Its Size

China’s government has so far been quiet about Huarong’s fate. Defaults at state-backed firms have increased in recent years as President Xi Jinping dialed back support for weaker borrowers to reduce moral hazard, though none of the borrowers that missed payments were as systemically important as Huarong.

The company owes domestic and international bondholders the equivalent of about $41 billion and ranks among the biggest Chinese issuers in offshore markets. It is majority owned by China’s Ministry of Finance and is deeply intertwined with the nation’s $54 trillion financial industry. Any default would shatter a longstanding assumption that the government will always step in to help to important state companies in times of trouble.

Huarong has drafted a proposal to offload unprofitable and non-core businesses, while avoiding the need for a debt restructuring, Bloomberg News reported earlier. The plan would require approval from Chinese regulators.

Authorities are also said to be mulling a proposal to shift more than 100 billion yuan ($15.5 billion) of assets from Huarong to a unit of China’s central bank. Meanwhile, the Ministry of Finance is considering transferring its ownership stake to a unit of the nation’s sovereign wealth fund, which has more experience resolving debt risks.

Fitch Ratings and Moody’s Investors Service downgraded Huarong in late April, highlighting a lack of clarity over the scope of Beijing’s support.

Xu Yongli, the company’s vice president and board secretary, told state-run Shanghai Securities News on April 30 that the downgrades “have no factual basis” and were “too pessimistic.” Xu said there’s no evidence indicating a change to its shareholding structure, or any signs of a change in the government’s level of support.

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With assistance from Bloomberg